Non-renewable natural capital and the social cost of carbon in wealth accounting

Abstract

Fossil fuels represent a significant portion of the wealth of resourcerich nations. However, their valuation as non-renewable natural capital in inclusive or comprehensive wealth accounting to indicate sustainability does not embody the external costs of climate change damages. This study consistently incorporates the social cost of carbon (SCC) into the value of depletion of non-renewable natural capital for wealth accounting of resource-rich nations. We derive shadow prices of depletion under different resource allocation mechanisms (RAMs) in the presence of externality costs from emission, allowing for declining extraction and an unburnable natural capital stock constraint. In our application to oil, depletion is valued differently across RAMs, depending on how rent, SCC, and decarbonisation develop in the future. The sustainability implication of the choice of RAM is even more significant in the presence of SCC.